Thursday, November 27, 2008

According to the theory, the more developed a country becomes, the tighter its environmental regulations. That is at least the premise behind the shape of the environmental Kuznets curve.

So why would the US, one of the world's most highly developed countries (or is it....), introduce legislation to weaken environmental regulations?

This also represents the Colarado Independent's first appearance on this blog. To compare the EPA with "humpty-dumpty" and "Alice in Wonderland" marks an impressive debut. The article needs to be read in full for these insults to be even vaguely understood.

The Environmental Protection Agency seems on the brink of issuing a new regulation that would make it easier for power plants to operate longer hours — and emit more pollution.

Under the proposed rule, power plants would be able to measure their rate of emissions on an hourly basis instead of their annual total output. As long as the hourly emissions stay at or below the plant’s established maximum, the plant would be treated as if it were operating cleanly — even if its total annual emissions increased as plant managers stepped up output.

Under the current policy, power plants that seek to operate longer must install pollution-control equipment. The proposed rule, expected to be finalized in the next two weeks, would increase the life span of older power plants without owners having to install costly new pollution-control equipment.

The rule, though, may be in conflict with a 2007 Supreme Court case, Environmental Defense v. Duke Energy Corp. In a 9-0 ruling, the justices decided that the Clean Air Act required Duke Energy to install pollution-control equipment if its annual pollution output increased. The court made clear that power plants must measure their pollution based on annual output, not an hourly rate.

The proposed power-plant rule marks a final attempt by the Bush administration to radically revise the way environmental laws are applied, especially the Clean Air Act. Throughout his presidency, George W. Bush has sought to weaken the traditional regulatory authority of many federal agencies — like the Food and Drug Admin. and Consumer Product Safety Commission — to make them more friendly to business. This anti-regulatory stand has had perhaps its most sweeping effect on the EPA.

But the administration’s drive to weaken environment safeguards has gotten it into legal trouble. Since Bush took office in 2001, the EPA has issued 27 air-pollution regulations. Seventeen were either partly or entirely thrown out by the D.C. circuit court, which oversees cases involving federal regulation. One, the Duke Energy case, was reversed by the Supreme Court.

In many of the rulings, judges used caustic language in striking down the administration’s position. They lectured EPA officials on elementary legal principles, like the importance of carefully reading the language of a law. The agency has been compared to Humpty Dumpty and the Queen of Hearts in “Alice in Wonderland.”

Wednesday, November 26, 2008

George Monbiot is always good for a quote and an excellent headline. The use of the term "pollutocrat" is enough to justify an appearance on this blog. This article is also suitably doom-laden suggesting that there is no way back from the path of ultimate destruction that we appear to be running along.

Monbiot always goes over the top and this article is not exception but it at least sets the extreme position from which we can work back from. The policies of both Obama and Brown seem ambitious and yet:

The trajectory both Barack Obama and Gordon Brown have proposed - an 80% cut by 2050 - means reducing emissions by an average of 2% a year. This programme, the figures in the Tyndall paper suggest, is likely to commit the world to at least four or five degrees of warming, which means the likely collapse of human civilisation across much of the planet. Is this acceptable?

So even if we manage to make Brown's cuts human civilisation will still collapse - hmmm.

There is however a serious point. The Bush midnight regulations need to be looked at carefully. Obama should still be able to reverse anything too controversial under existing legislation but Bush is clearly putting as much through as possible hoping that at least some of it will stick.

George Bush is behaving like a furious defaulter whose home is about to be repossessed. Smashing the porcelain, ripping the doors off their hinges, he is determined that there will be nothing worth owning by the time the bastards kick him out. His midnight regulations, opening America's wilderness to logging and mining, trashing pollution controls, tearing up conservation laws, will do almost as much damage in the last 60 days of his presidency as he achieved in the foregoing 3,000.

His backers - among them the nastiest pollutocrats in America - are calling in their favours. But this last binge of vandalism is also the Bush presidency reduced to its essentials. Destruction is not an accidental product of its ideology. Destruction is the ideology. Neoconservatism is power expressed by showing that you can reduce any part of the world to rubble.

If it is too late to prevent runaway climate change, the Bush team must carry much of the blame. His wilful trashing of the Middle Climate - the interlude of benign temperatures which allowed human civilisation to flourish - makes the mass murder he engineered in Iraq only the second of his crimes against humanity. Bush has waged his war on science with the same obtuse determination with which he has waged his war on terror.

Is it too late? To say so is to make it true. To suggest there is nothing that can be done is to ensure that nothing is done. But even a resolute optimist like me finds hope ever harder to summon. A new summary of the science published since last year's Intergovernmental Panel report suggests that - almost a century ahead of schedule - the critical climate processes might have begun.

Just a year ago the Intergovernmental Panel warned that the Arctic's "late-summer sea ice is projected to disappear almost completely towards the end of the 21st century ... in some models." But, as the new report by the Public Interest Research Centre (Pirc) shows, climate scientists are now predicting the end of late-summer sea ice within three to seven years. The trajectory of current melting plummets through the graphs like a meteorite falling to earth.

Forget the sodding polar bears: this is about all of us. As the ice disappears, the region becomes darker, which means that it absorbs more heat. A recent paper published in Geophysical Research Letters shows that the extra warming caused by disappearing sea ice penetrates 1,000 miles inland, covering almost the entire region of continuous permafrost. Arctic permafrost contains twice as much carbon as the entire global atmosphere. It remains safe for as long as the ground stays frozen. But the melting has begun. Methane gushers are now gassing out of some places with such force that they keep the water open in Arctic lakes through the winter.

The effects of melting permafrost are not incorporated in any global climate models. Runaway warming in the Arctic alone could flip the entire planet into a new climatic state. The Middle Climate could collapse faster and sooner than the grimmest forecasts proposed.

Barack Obama's speech to the US climate summit last week was an astonishing development. It shows that, in this respect at least, there really is a prospect of profound political change in America. But while he described a workable plan for dealing with the problem perceived by the Earth Summit of 1992, the measures he proposes are hopelessly out of date. The science has moved on. The events the Earth Summit and the Kyoto process were supposed to have prevented are already beginning. Thanks to the wrecking tactics of Bush the elder, Clinton (and Gore) and Bush the younger, steady, sensible programmes of the kind that Obama proposes are now irrelevant. As the Pirc report suggests, the years of sabotage and procrastination have left us with only one remaining shot: a crash programme of total energy replacement.

A paper by the Tyndall Centre for Climate Change Research shows that if we are to give ourselves a roughly even chance of preventing more than two degrees of warming, global emissions from energy must peak by 2015 and decline by between 6% and 8% per year from 2020 to 2040, leading to a complete decarbonisation of the global economy soon after 2050. Even this programme would work only if some optimistic assumptions about the response of the biosphere hold true. Delivering a high chance of preventing two degrees of warming would mean cutting global emissions by more than 8% a year.

Is this possible? Is this acceptable? The Tyndall paper points out that annual emission cuts greater than 1% have "been associated only with economic recession or upheaval". When the Soviet Union collapsed, emissions fell by some 5% a year. But you can answer these questions only by considering the alternatives. The trajectory both Barack Obama and Gordon Brown have proposed - an 80% cut by 2050 - means reducing emissions by an average of 2% a year. This programme, the figures in the Tyndall paper suggest, is likely to commit the world to at least four or five degrees of warming, which means the likely collapse of human civilisation across much of the planet. Is this acceptable?

The costs of a total energy replacement and conservation plan would be astronomical, the speed improbable. But the governments of the rich nations have already deployed a scheme like this for another purpose. A survey by the broadcasting network CNBC suggests that the US federal government has now spent $4.2 trillion in response to the financial crisis, more than the total spending on the second world war when adjusted for inflation. Do we want to be remembered as the generation that saved the banks and let the biosphere collapse?

This approach is challenged by the American thinker Sharon Astyk. In an interesting new essay, she points out that replacing the world's energy infrastructure involves "an enormous front-load of fossil fuels", which are required to manufacture wind turbines, electric cars, new grid connections, insulation and all the rest. This could push us past the climate tipping point. Instead, she proposes, we must ask people "to make short term, radical sacrifices", cutting our energy consumption by 50%, with little technological assistance, in five years.

There are two problems: the first is that all previous attempts show that relying on voluntary abstinence does not work. The second is that a 10% annual cut in energy consumption while the infrastructure remains mostly unchanged means a 10% annual cut in total consumption: a deeper depression than the modern world has ever experienced. No political system - even an absolute monarchy - could survive an economic collapse on this scale.

She is right about the risks of a technological green new deal, but these are risks we have to take. Astyk's proposals travel far into the realm of wishful thinking. Even the technological new deal I favour inhabits the distant margins of possibility.

Can we do it? Search me. Reviewing the new evidence, I have to admit that we might have left it too late. But there is another question I can answer more easily. Can we afford not to try? No, we can't.

THE KYOTO PROTOCOL - Binds industrialised nations except the United States to cut emissions on average by at least 5 percent below 1990 levels by 2008-12.

GROUP OF EIGHT - Leading industrial nations agreed at a G8 summit in Japan in July to a "vision" of cutting world emissions of greenhouse gases by 50 percent by 2050.

GLOBAL - About 190 nations agreed last year to work out a new treaty by the end of 2009 to succeed Kyoto, comprising deeper emissions cuts by rich nations and action by poor countries to slow their rising emissions.

NATIONAL GOALS

UNITED STATES - President-elect Barack Obama favours cutting US emissions to 1990 levels by 2020 and by 80 percent below 1990 by 2050. US emissions were 14 percent above 1990 levels in 2006. Obama says clean energy investments of up to $150 billion over 10 years could create 5 million new jobs.

EUROPEAN UNION - EU leaders agreed in 2007 to cut emissions by 20 percent below 1990 levels by 2020, and by 30 percent if other nations make similar cuts. A Dec. 11-12 EU summit will try to agree details. EU leaders want rich countries to aim to reduce emissions by 60 to 80 percent by 2050 from 1990 levels.

CHINA - A 2006-10 plan aims to reduce energy consumption per unit of gross domestic product by 20 percent, curbing the rise of greenhouse gas emissions. Beijing also plans to quadruple gross domestic product between 2001 and 2020 while only doubling energy use. Beijing said this month it would spend an extra 4 trillion yuan (US$586 billion) to help boost demand, including investments in green sectors.

INDIA - New Delhi says priority must go to economic growth to end poverty while shifting to clean energies led by solar power. A climate plan in June set no greenhouse caps but said per capita emissions will never exceed those of rich nations.

JAPAN - Tokyo plans to cut greenhouse gas emissions by 60-80 percent below 2005 levels by 2050, implying a cut of about 14 percent by 2020 from 2005. That would put emissions about 4 percent below 1990 levels by 2020.

SOUTH KOREA - The government plans next year to set a 2020 target to curb rising emissions.

AUSTRALIA - The centre-left government aims to cut emissions by 60 percent below 2000 levels by 2050. It plans to announce a 2020 target in coming days.

SOUTH AFRICA - The government aims to brake rising emissions and has outlined a scenario with emissions rising until 2020-25, staying flat for up to a decade and then falling. It will set mandatory energy efficiency targets and a shift away from coal.

NORWAY - Aims to cut emissions by 30 percent from 1990 levels by 2020 and to make the nation "carbon neutral", meaning that any emissions in one sector would be offset elsewhere, by 2030.

COSTA RICA - Aims to cut its net greenhouse gas emissions to zero by 2021, the 200th anniversary of independence.

Tuesday, November 25, 2008

The stalemate between developed and developing nations on who should do what and when in the battle against climate change only ever had one answer. The rich nations would have to cut CO2 emissions first. Developing countries would never back down from the arguments that (1) poverty reduction is the priority and (2) the rich nations caused the problem in the first place.

There can be only one solution. At least now academics at Harvard and around the world agree. The Harvard plan makes sense because it is the only logical solution. I suspect the timing of the "plan" is to give a broad hint to the incoming president. The key as always is the US. Europe is already planning and cutting.

Two excellent environmental economists, Jo Aldy and Robert Stavins are leading the project.

First is the PlanetArk report and then I provide the executive summary. It is interesting to compare and contrast.

The interim report is worth reading in full and contains papers from leading environmental economists including a series of papers discussing alternative international policy architectures from authors such as Ellerman, Frankel, Karp, Jaffe and others. Of most interest in the paper by Ellerman:

LONDON - Rich nations should make the first cuts in greenhouse gases while developing countries carry on business as usual for the time being, according to a plan set out on Monday by a Harvard University project.

This is one of four proposals by the American university's Belfer Centre for Science and International Affairs to negotiators who meet for UN climate talks next week in Poland.

The current climate pact, the Kyoto Protocol, expires in 2012 and governments are scrambling to agree a new treaty by the end of next year.

"The new agreement should be scientifically sound, economically rational and politically pragmatic," Professor Robert Stavins of the Harvard Project on International Climate Agreements said.

The Harvard report calls on rich nations to lead in cutting emissions, while developing countries can "maintain their business-as-usual emissions in the first decades, but over the longer term agree to binding targets that ultimately reduce emissions below business as usual."

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"The agreement should be cost-effective and consistent with the recommendations of the Intergovernmental Panel on Climate Change," Stavins said, referring to the Nobel Peace Prize-winning scientific body.

Observers hope a new pact will include the US, which did not ratify the original agreement, and commit developing nations like China and India to binding emissions targets.

"We need an agreement that can be ratified in the US Senate and provide increasingly meaningful roles for developing countries. We see those as essential ingredients," Stavins said.

Last week President-elect Barack Obama said the US would "engage vigorously" in climate change talks when he takes office next year.

Obama wants to reduce US carbon emissions to their 1990 levels by 2020 and cut them by an additional 80 percent by 2050.

FAIR DEAL

The Harvard report proposes introducing national carbon taxes, linking emissions trading schemes or pursuing a series of simpler, possibly bilateral agreements that separately address the different gases and their sources as the other ways to fight warming.

"Countries will only participate in an international agreement if they believe they received a fair deal," the initiative said in a statement.

But the line dividing rich and poor nations set out in Kyoto may need to be redrawn, as the global economic landscape has altered in the past 10 years.

"If you look at the non-Annex I countries, 50 of them have higher per-capita income than the poorest Annex I countries," Stavins told Reuters.

The report said other key components of a new deal should promote clean energy technology transfer between rich and poor nations, reform Kyoto's emissions trading schemes and combat deforestation, something the original treaty failed to address.

It emphasized that any new deal must be compatible with global trade policy to prevent potential trade wars.

"Global efforts to address climate change may be on a 'collision course' with the World Trade Organization, as nations that have agreed to put a price on carbon look for ways to keep their companies competitive globally," the report said.

Citing the WTO as an example, the report suggests an independent international institution be set up to survey and review the policies, actions and outcomes of participating countries' climate change policies.

The report combines the work of 28 research teams from around the world, including China, India, the US and Europe.

A way forward is needed for the post-2012 period to address the threat of global climate change. The Harvard Project on International Climate Agreements is an international, multi-year, multi-disciplinary effort to help identify the key design elements of a scientifically sound, economically rational, and politically pragmatic post-2012 international policy architecture. Leading thinkers from academia, private industry, government, and non-governmental organizations around the world have contributed and will continue to contribute to this effort. The foundation for the Project is a book published in September 2007 by Cambridge University Press, Architectures for Agreement: Addressing Global Climate Change in the Post-Kyoto World (Aldy and Stavins 2007). From that starting point, the Harvard Project on International Climate Agreements aims to help forge a broad-based consensus on a potential successor to the Kyoto Protocol. The Project includes 28 research teams operating in Europe, the United States, China, India, Japan, and Australia.

The work of the Project is being carried out in three stages. The first stage featured meetings with key domestic and international policy constituencies to discuss considerations regarding potential successors to Kyoto. The second stage focused on policy analysis and economic modeling to develop a small set of promising policy frameworks and key design elements. In the third stage, Project researchers are exploring key design principles and alternative international policy architectures with domestic and international audiences, including the new administration and Congress in the United States. This interim report identifies some of the key principles, promising policy architectures, and guidelines for essential design elements that have begun to emerge, building upon lessons learned from the 28 research initiatives.

Learning from Kyoto

Among the strengths of the Kyoto Protocol is its inclusion of provisions for market-based approaches — the three so-called flexibility mechanisms. A second feature of the Protocol is that it provides freedom for nations to meet their national targets and commitments in any way they want. Third, the agreement has the appearance of fairness in that it focuses on the wealthiest countries and those most responsible for the current stock of greenhouse gases in the atmosphere, consistent with the principle — first enunciated in the Framework Convention on Climate Change — of common but differentiated responsibilities and respective capabilities. Fourth, the fact that the Protocol was signed by more than 180 countries and subsequently ratified by a sufficient number of Annex I countries to come into force may be taken as an indicator of its political viability.

The weaknesses of the Kyoto Protocol also provide valuable lessons. First, some of the largest emitters are not constrained by Kyoto. The Protocol has not been ratified by the United States, and it does not include emissions targets for some of the largest and most rapidly growing economies in the developing world. Second, a relatively small number of countries are asked to take action, which has resulted in concerns about emissions leakage and competitiveness. Third, the nature of the Protocol's emissions trading elements has caused concern. The provision in Article 17 for international emissions trading among nation-states is unlikely to be effective, if it is utilized at all. And the Clean Development Mechanism (CDM) is plagued by criticisms that it is crediting projects that would have happened anyway (commonly known as the problem of "additionality"). Fourth, the Kyoto Protocol — with its five year time horizon (2008 to 2012) — represents a relatively short-term approach for what is fundamentally a long-term problem. Finally, the agreement may not provide sufficient incentives for compliance....

BEIJING -- After years of small-scale experiments in using so-called emissions trading to reduce pollution, China is taking steps to set up a nationwide system.

In recent months, three cities -- Shanghai, Beijing and Tianjin -- have begun creating emissions exchanges modeled after a system pioneered in the U.S. to reduce emissions that caused acid rain.

Known as cap-and-trade, this system sets an overall limit, or cap, on how much an industry can pollute. Individual companies get permits, which can then be traded. A company that invests in cutting its emissions can, for instance, sell its credits to a company that operates less cleanly. Traders can speculate on the future value of the credits. When more production means more pollution, the permits gain value.

A similar approach is being used with the carbon markets in Europe, where national limits on greenhouse gases have been set and companies can trade credits that have been approved through the United Nations's Kyoto Protocol mechanism.

LONDON - The British government will take hefty revenues from its first carbon emissions permit auction on Wednesday rather than earmark the money for consumers or the climate it aims to protect, analysts and lobby groups said.

The UK's Department of Energy and Climate Change (DECC) will auction 4 million permits out of a total 84 million from the second phase of the European Union's Emissions Trading Scheme (EU ETS), which runs from 2008-12.

It plans to auction a further 25 million of the credits, called EU Allowances (EUAs), next year.

Wednesday's sale, which could set a model for more in the coming months, will raise around 67 million euros ($84.58 million) for government coffers, based on Tuesday's EUA price of 16.8 euros per tonne.

LONDON - The British government sold 4 million permits in the country's first auction of European Union carbon emissions allowances but held that revenues would not necessarily be used to fight climate change.

The permits, called EU Allowances (EUAs), were sold on Wednesday to industry at 16.15 euros a tonne, raising 64.6 million euros ($81.55 million) for the British Treasury.

Under the EU's Emissions Trading Scheme, companies receive a set quota of permits to emit greenhouse gases which they can trade with other participants, thus putting a price on polluting.

This is the first EUA auction in the scheme's second phase, which runs from 2008-2012, and was open to participants globally.

"Today's first Phase 2 auction demonstrates continued UK leadership in reducing carbon emissions as part of the fight against dangerous climate change," the UK's Energy and Climate Change Minister of State Mike O'Brien said in a statement.

Britain's Department of Energy and Climate Change plans to auction a further 25 million EUAs next year.

Monday, November 17, 2008

Bjorn Lomborg the Danish statistican with a habit of upsetting environmentalists has written a Guardian opinion piece.

This article links to a number of previous posts I have made on the topic of "green jobs". Academic articles are also beginning to emerge. I think it is safe to say that green jobs are unlikely to compensate for jobs lost if "heavy industry" becomes uncompetitive although their may be a "first mover advantage" for certain countries in certain sectors.

Whilst I have some sympathy for Lomborg's argument I believe he is over simplifying the issue and missing a number of important elements of the story.

The green pseudo-revolution"Whatever the enviro-lobbyists say, subsidising inefficient green industries is not the way to tackle climate change"

Many green pundits have, however, started saying that the financial crisis only makes the need for action on climate change greater. They urge America's president-elect Barack Obama to pursue a "green revolution" with big investments in renewable energy, arguing that this could create millions of new "green collar" jobs and open huge new markets. Such sentiments, no surprise, are strongly voiced by business leaders who live off such subsidies. But are such pleas smart investments for society?

The problem with the green revolution argument is that it doesn't trouble itself about efficiency. It is most often lauded for supplying new jobs. But billions of dollars in tax subsidies would create plenty of new jobs in almost any sector: the point is that many less capital-intensive sectors would create many more jobs for a given investment of taxpayers' money.

Similarly, green initiatives will open new markets only if other nations subsidise inefficient technologies bought abroad. Thus, the real game becomes which nations get to suck up other nations' tax-financed subsidies. Apart from the resulting global inefficiency, this also creates a whole new raft of industry players that will keep pushing inefficient legislation, simply because it fills their coffers.

In my recent lecture on the economics of fisheries I touched on the problem of enforcement of regulations and the prevalence of illegal fishing. Today, Brussels issued a statement regarding the extent of illegal fishing.

Any regulation has to be simple and easy to enforce. Two characteristics conspicuous by their absence in the current regulatory framework.

BRUSSELS - Europe's fisheries chief proposed toughening EU rules on Friday to crack down on illegal fishing, largely blamed for depleting fish stocks, by using a penalty point system similar to that for driving offences.

European Union Fisheries Commissioner Joe Borg, who has often complained that existing controls are inadequate, proposed tightening up controls on inspections, monitoring and traceability requirements for the fishing industry.

Many species of fish in European waters, especially cod, haddock and hake, been severely depleted by years of overfishing and some are at risk of disappearing entirely.

Under the new points system, if a certain number of offences are racked up over three years -- for example, if trawlers use small-mesh nets to trap extra fish, or fish in closed seasons -- holders of fishing permits would lose their right to fish in EU waters, after suspension periods of six and then 12 months.

"Control and enforcement should be the cornerstone of the Common Fisheries Policy. Instead, it is our Achilles' heel," Borg told a news conference, adding that a 'collective failure' to implement the rules made a mockery of EU fishing controls.

The current system, dating back to 1993 and amended more than a dozen times, was inefficient, expensive and too complex, he said -- and it was now time to ensure that 'those who break the rules do not reap the profits of their illegal actions'.

Despite spending 400 million euros ($500 million) a year on fishing controls, the EU still has unreliable data on fish catches, the EU Commission says.

EU fisheries ministers will have to agree to the new measures before they can enter into force.

The points system would apply to the fishing vessel, and to the crew's master and officers. Offences would be collated in a points register in the ship's home country.

The new rules would apply to EU vessels even if they fish outside European waters. They would also cover non-EU vessels within the European Union. However, any existing bilateral arrangements would take precedence.

Borg also proposed making it compulsory for EU countries to inspect fish landings, processing, transport and marketing, as well as to monitor criteria such as a vessel's fishing capacity and its engine power.

If a country breaks the rules, its EU subsidies could be cut or suspended, annual catch quotas reduced and even fishing forbidden in its waters, Borg said.

Under Borg's proposal, EU inspectors could check vessels outside their national waters, and officials from one country could inspect the ships of another. Under current rules, each country may only inspect its own fishing fleet.

Monday, November 10, 2008

Fishing in open seas is a typical illustration of a situation where the tragedy of the commons is likely to occur. All the conditions described by Hardin are met in this case: an unrestricted number of users, unfettered by any limits on their access, extract an increasing share of a resource until natural resources are severely depleted, sometimes to the point of no return. Fishers tend to have little incentive to practice conservation, for they know that if they do not catch the available fish, someone else probably will. Without limits in place, fishers try to catch as many fish as they possibly can.

The following graph from the article above shows clearly how catch size has shrunk as fleet size has grown. A greater tragedy of the commons is not hard to imagine unless a solution can be found.

The rest of the article goes on to describe the problem and various proposed solutions.

As my students begin their ETS essay the more astute of them will bring their essays bang up to date with a mention of the current price of carbon. Those students reading this blog can consider themselves "astute" by proxy.

Note that now the whole premise behind the ETS is being questioned. In the essay I ask whether it has been a success. This article hints at part of the answer.

WHILE you were distracted by crashing banks and clashing US senators, you may have missed a small environmental earthquake.

The price of carbon has collapsed.

In only three months, life has become a lot cheaper for polluters. The financial cost of warming the planet has plummeted in Europe's emissions trading system (ETS) and the effectiveness of such a volatile market mechanism in curbing carbon is being questioned.

You may recall that the ETS is a mechanism to encourage businesses to reduce their carbon output. Europe's larger companies are allocated permits to emit CO2, and these allowances, called EUAs, can be traded on exchanges.

Companies that emit less CO2 than their allocation can sell EUAs for cash, but inefficient polluters must buy EUAs or face financial penalties.

The idea is that a shortfall in EUAs allocated by governments will cause the carbon price to rise, stimulating investment in carbon reduction.

It's a market solution to pollution, but this carbon market is showing a distressing tendency to behave like most financial markets -- hysterically. In July, the right to spew out one tonne of CO2 from a chimney would have cost a power generator E29.33, but yesterday it could be bought for only E18.25 ($34.14).

The sudden collapse of the carbon price mirrors the rout in the wider commodity markets. Carbon peaked in July, its price summit occurring within 10 days of the peak in the crude oil price.

Since then, everything from steel to potash has been tumbling and you might think it unsurprising that carbon has tracked the general retreat. Hedge funds and other financial investors dabbled in EUAs as they fiddled with palm oil and soya.

The rush to convert hedge fund investments into cash and US Treasury bills has resulted in rapid closure of positions on various carbon exchanges.

Obviously, the credit crunch has little to do with underlying demand for EUAs in a market artificially created by regulators in Brussels. However, economic downturn and recession will affect the carbon market.

Less industrial and transport activity implies fewer emissions, so the shortfall between actual emissions and allowances will shrink, reducing demand for EUAs, thereby causing the carbon price to fall.

Some analysts reckon the carbon price has fallen far enough, even allowing for a recession. IDEAcarbon, a rating agency, has halved its estimate of the allocation shortfall from 206 million tonnes of carbon to 98 million tonnes in 2008 and 83 million tonnes in 2009.

The point is that there will still be a shortfall. Societe Generale reckons EUAs will find a floor at E15 per tonne before rebounding next year into the low E20s per tonne.

Maybe so, but the ETS is making a mockery of Europe's stumbling attempts to lead the world with a market-based carbon strategy. It is causing irritation and frustration to the armies of advisers and investors who seek to cajole utilities into big investments in carbon reduction.

James Cameron, the director of Climate Change Capital, a financial adviser and fund manager, said: "The whole purpose of the ETS is to take carbon out. It's not there to benefit funds or to support trading."

It's those "speculators" again -- the ones that pushed the oil price up the hill to $US147 a barrel and then let it roll back to $US60.

It is a terrible irony that one aim of creating a carbon market was to provide a measure of certainty to the energy industry in estimating the future price of carbon for the purpose of planning investments in new power generators.

Estimates of the price at which carbon capture and storage technology might be economically viable vary between E40 and E60 a tonne. Suffice it to say we are nowhere near these levels.

More political action is needed, Cameron says, with smaller carbon allocations by governments to industry, which would entail a much bigger shortfall in EUAs and a much higher carbon price.

It is a moot point, however, whether there is political appetite in Europe for such a burden. The European Commission is already struggling to create a coalition of the willing to do battle with carbon emissions, and Italian Prime Minister Silvio Berlusconi has made clear his preference for a gentle regime.

It's a measure of the speed at which politics moves in response to market prices that the green agenda has almost vanished from media political chatter.

Carbon's falling price spells companies going bust, the loss of jobs and the shredding of political reputations. Over the next year, no politician with re-election hopes will back a policy that would triple the price of carbon for industry and raise consumers' energy costs. There is a wider question about the ETS that must be addressed, and that is whether it is a sensible mechanism to regulate carbon.

Price volatility, whether in oil, gas or coal, is a huge burden for the energy industry. Violent movements in price cause financial damage and promote short-termism -- the sort of thinking that is anathema to the climate change lobby.

If there is to be any prospect of a serious cut in carbon, there must be stability in carbon pricing. Although a financial market gives useful price signals, it cannot provide stability.

Only a stable regulatory regime can provide certainty, but that means carbon taxes and a policy leap that no one is yet willing to make.

Research into the existence or otherwise of a "pollution haven" effect continues to develop. This is due in part to the lack of conclusive evidence for or against such an effect.

Whilst the pollution haven hypothesis is intuitively attractive it is also fairly obvious (intuitively) why little evidence would be expected. This is how we argued the case in our 2003 JEEM paper which I still think some PHH papers are missing.

This paper argues that pollution intensive sectors may be subject to opposing sources of comparative advantage if we consider comparative advantage to be a function of a country’s endowment of capital, labor and pollution (the environment). On the one hand, the pure environmental regulation effect (ERE) would see the composition effect determined by the relative stringency of environmental regulations. The ERE implies that a country with a lower than average level of environmental regulations will have a comparative advantage in pollution intensive production. Since there is a high correlation between a country’s per capita income level and the stringency of its environmental regulations (see Dasgupta et al. 1995), the pure ERE implies that developing countries or regions (the South) will become pollution havens, whilst the developed world (the North) will specialize in clean production. In contrast, the pure capital-labor effect (KLE) would see the composition effect determined by relative capital and labor endowments. That the North is more capital-abundant than the South is well documented. What is less well understood is that there is also a high correlation between a sector’s capital intensity and its pollution intensity. Therefore, in the presence of trade liberalization, the KLE would result in the North increasing its specialization in capital intensive, and therefore pollution intensive, production whilst the South would specialize in relatively cleaner, labor-intensive production. This is the opposite effect to that stemming from the ERE.

It is good news that further methodological developments are taking place and I think the spatial aspects of this problem have been overlooked until recently. Here are two such papers:

Abstract: Although based on theoretical foundations, the pollution haven hypothesis has never been clearly proven empirically. In this study, we re-examine this hypothesis by a fresh take on both its theoretical and empirical aspects. While applying a geographic economy model on French firm-level data, we confirm the hypothesis for the global sample. Through sensitivity analysis, we validate it for Central and Eastern European countries, emerging and high-income OECD countries, but not for the major part of the Commonwealth of Independent States countries. Finally, we show that the pollution haven hypothesis is confirmed in the strongest manner for emerging economies.

This paper investigates if differences in environmental regulations can influence FDI flows in a multi-country setting taking into account the so-called "third-country" effects. We examine bilateral FDI flows using a new extended OECD investment database which covers great number of host countries and a long sample period (1981-2005). The findings based on a spatial gravity-like model are largely plausible across specifications and confirm the existence of a negative relationship between FDI and environmental stringency, once we correct for endogeneity and spatial dependence. The evidence of a positive "third-country" effect for FDI suggests the prevalence of complex FDI from developed to developing countries. The spatial structure of the model allows also to underline the possible existence of competition in environmental standards between countries to attract FDI.

Abstract: In this paper we advocate a new initial allocation mechanism for a tradable pollution permit market. We outline a Permit Allocation Contest (PAC) that distributes permits to firms based on their rank relative to other firms. This ranking is achieved by ordering firms based on an observable 'external action' where the external action is an activity or characteristic of the firm that is independent of their choice of emissions in the tradeable permit market. We argue that this mechanism has a number of benefits over auctioning and grandfathering. Using this mechanism efficiently distributes permits, allows for the attainment of a sec- ondary policy objective and has the potential to be more politically appealing than existing alternatives.

Having just returned from a week long visit to China (of which more later) it is fitting to mark my return with a China-centric post.

The premise of this press release is that rich nations should change their lifestyles to help fight climate change. This statement is fine by itself but there is a problem here.

After visiting China for a week it is clear that Chinese citizens are attempting to replicate the Western lifestyle as quickly as possible. The capitalist ethos in China is very strong and the learning curve is very steep. The view from the top of the Oriental Peal in Shanghai for example is a sea of neon lights to rival any in the world.

Conspicuous consumption is also rising rapidly. I have never seen "jewelry and gold shops" doing so much business in any Western city.

So whilst it is fine to ask western consumers to change their lifestyles this type of lifestyle emulation has to some how be seen as less attractive.

There is also no getting away from the large and growing income inequality in China. This is something that needs to be looked at carefully by researchers as I think the implications are potentially serious. There are some seemingly strange anomalies in the pricing of goods in China relative to wages that I find fascinating.

Wen told the opening of a conference on Friday the financial crisis was no reason for rich nations to delay fighting global warming.

"As the global financial crisis spreads and worsens, and the world economy slows down apparently, the international community must not waver in its determination to tackle climate change," Xinhua news agency quoted him as saying.

About me

This blog is written by Professor Rob Elliott, an academic economist, with an interest in all things international and environmental..I am currently a Professor of International and Environmental Economics at the University of Birmingham..Find me at my homepage.

This weeks read

Following the recent workshop on the "Economics of the Stern Review" and the fuss caused by the "great global warming swindle" this book represents an excellent introduction to the topic. Chapter 6 is the chapter it all hinges upon.